FDCPA Class Action Claim Belonged to Bankruptcy Estate and Settlement of Individual Claim Appropriate because Trustee could not Prosecute Class Action Ohio Federal Court Holds
After a law firm filed an action to collect a debt from her, plaintiff filed a putative class action against the law firm alleging violations of the federal Fair Debt Collection Practices Act (FDCPA). Griffith v. Javitch, Block & Rathbone, LLP, 358 B.R. 338, 340 (S.D. Ohio 2007). Shortly thereafter, plaintiff and her husband filed a Chapter 7 bankruptcy petition in the federal court for the Southern District of Ohio, staying the underlying action, and plaintiff listed the class action as a contingent claim her creditor, Great Seneca Financial Corporation, but did not separately list her class action against the law firm. Id. The bankruptcy trustee determined that it was a no-asset case, and plaintiff and her husband received a bankruptcy discharge in October 2004; less than a month later, the underlying lawsuit was reopened. Id. The parties jointly requested a stay pending a decision by the federal Court of Appeals for the Sixth Circuit in a case concerning “several defenses to an FDCPA suit that are raised by [the law firm] here on essentially identical factual allegations,” id. (citing Todd v. Weltman, Weinberg & Reis, 434 F.3d 432 (6th Cir. 2006). The underlying class action again became active in June 2006.
Defense attorneys moved for dismissal or summary judgment, arguing that the class action claim belonged to the bankruptcy trustee because it was not properly listed on the bankruptcy petition schedules; accordingly, the defense argued, plaintiff lacked standing to prosecute the class action. Griffith, at 340. Plaintiff countered that a “class action claim” had been listed on the petition, and advised the court that the bankruptcy trustee would be filing a formal abandonment of the claim so that her class action could proceed; instead, the trustee advised plaintiff’s lawyer that it would not be in the best interests of the bankruptcy estate to abandon the claim. Id. The court issued an order to show cause why the complaint should not be dismissed for lack of standing, but the defense motions were held in abeyance pending further bankruptcy court proceedings. Id. The trustee moved to reopen the bankruptcy case, and to hire plaintiff’s lawyer to prosecute the class action on behalf of the estate. Id.
Defense attorneys made a Rule 68 Offer of Judgment in the amount of $2,000 to the bankruptcy trustee, noting that the maximum statutory recovery on an FDCPA claim is $1,000 and that the defense was offering double that amount to cover the trustee’s costs and filing fees; the Offer would also obviate the need to hire an attorney to prosecute the FDCPA claim. Griffith, at 341. The Offer further noted that the trustee would not be an adequate class representative, and argued that the maximum recovery under the class action would be no more than $30,000 to be divided among 20,000 class members. Id. The trustee expressed an interest in accepting the offer; plaintiff’s lawyer argued that the claim belonged to plaintiff, not the estate. Id. The trustee negotiated a $4,000 settlement with the defense; the bankruptcy court permitted the trustee to withdraw the application to appoint counsel to prosecute the FDCPA claim and in November 2006 approved the settlement. Id.
Plaintiff filed a motion to prohibit the settlement from proceeding, and to order notice to the “class” – despite the fact that the suit had not been certified as a class action. Griffith, at 341. The bankruptcy court first held that the FDCPA class action claim clearly belonged to the trustee in light of his declaration that he was unaware of the claim until August 2006. Id. One he learned of the claim, the bankruptcy trustee refused to abandon it and immediately moved to reopen the bankruptcy case in order to pursue the claim for the benefit of the creditors of the estate. Id. The court held that it was equally clear the trustee could not prosecute the FDCPA claim as a class action because of “inhere conflicts in a trustee’s duty as trustee – primarily maximizing recovery for the estate’s creditors – and the duty of a class representative to maximize recovery for the class.” Id., at 341-42. The court agreed with plaintiff, however, that notice to putative class members was appropriate under the circumstances and ordered that notice be given of the dismissal of the class action. Id., at 342-43.